adminTendai Murwira My Two Cents
A fortnight ago, Art Corporation finally came to the market after spending more than a year issuing a series of cautionary statements.
The prolonged delay by Art in communicating with the market emanated from the various initiatives that were being pursued, chief among them being the search for a technical equity partner.
Another reason for the protracted talks was due to the lack of confidence by investors following the $4,67 million rights issue done in 2010.
Failure by company management to explain themselves on how the funds were utilised upset current and potential investors ultimately affecting progress.
In 2010, management had cited that 83 percent of the funds raised would go towards reducing debt, however, Art’s gearing has remained high adversely affecting profitability.
Art Corporation’s board of directors announced that Korean-based Taesung Chemical Company now owns 33,86 percent effective February 25, 2014. Taesung is a supplier of plastic raw materials, chemicals and machinery to the world.
Prior to the announcement, Taesung owned 41,95 percent which it had acquired in August 2013.
Nonetheless, the major shareholder reduced its cumulative shareholding in line with ZSE Listing requirements.
In addition to the change in ownership, Art also announced that the major shareholder had availed two facilities, namely $3 million for working capital and a $15 million facility for capital expenditure purposes.
In terms of the facility agreements, Taesung undertakes to supply raw materials up to a limit of US$3million and capital goods up to a limit of $15million.
The rationale for the proposed facility agreements according to the circular were that of debt reduction and automation of operations at Art’s battery manufacturing division, Eversharp and Kadoma Paper Mills.
Synergies and working capital management were also cited as other reasons for the trade facility.
Worth noting is that no significant draw down has been done as yet from the two facilities.
Automation of operations in battery, printing and stationary divisions is a step in the right direction as it has a positive impact on Art’s efficiencies. Automation of battery operations will go a long way as it is the major revenue contributor.
In their full year results to September, battery operations weighed in with 60 percent of total turnover whilst capacity utilisation stood at 65 percent.
By automating such a key unit, labour efficiencies and productivity will be realised, leading to reduction in unit costs and the same also applies to other units.
Thus, such a move is a cost cutting initiative which is critical in the current environment especially when demand is contracting.
More so, the anticipated technological advancement benefits will give Art an edge especially in battery manufacturing that is if it surpasses competition mainly from other foreign players.
In addition, an improvement in working capital management will also be positive for Art.
For the full year, the current ratio was largely unchanged at 0.8x below the internationally accepted levels of 1:1.
The relatively low ratio is due to the worsening liquidity squeeze in the economy.
By accessing a $3 million trade facility, working capital is forecast to improve mainly through better trade supply terms.
The group’s failure to declare the pricing of the facility however raises suspicion as some major local shareholders have provided such facilities at high costs eating into profitability.
While acknowledging the positives for the transaction, a closer analysis of the transaction leaves certain critical questions unanswered. Will the transaction really lead to debt reduction?
Will the facilities improve Art’s competitiveness against imports? Is it still viable to maintain the production model or go the retailing route for some of its operations?
The debt issue in Art’s perspective remains a critical issue.
Art for the past five years has been struggling with a huge debt.
As at end of September 2013, total debt stood at $8,18 million while total equity was $11,23 million translating to a high gearing ratio of 72,81 percent.
Art believes that through the working capital facility, cash flows will improve leading to a gradual reduction of debt.
Furthermore, the relatively low priced $3 million working capital facility will result in the overall cost of debt going down.
This may not be entirely correct as automation and working capital management may not result in improved profitability.
Management are forecasting a loss position for the half year to March 2014 and with the weakness in aggregate demand full year financial numbers may not be exciting at all.
Thus under such a scenario, the debt reduction benefits from the transaction are not visible yet this is one major issue which requires urgent attention.
Another area which has adversely affected Art in all its operating units has been the intense competition both from domestic and foreign players.
Management and the board may need to seriously consider this area as it is key to the revival of operations.
Automation in as much as it is recommended only leads to cost-effective production of the same products. Unless Art’s manages to produce the same products at lower costs than competition, the recovery process may remain a dream as most local manufacturers have been outperformed by the foreigners.
Art may need to really address its cost structures relative to how competitors are faring.
It may also be proper for management to consider adopting retailing of some products where they realise they cannot compete against foreigners rather than holding on to production.
Chemco and Powerspeed are some examples of firms that have shifted to such models and this is impacting positively on overall performance. A case in point for Art may be in the paper and stationery.
Most of the corporate transactions in Zimbabwe need to be taken with a certain level of skepticism relating to their success rate.
Thus credit will be given to the board and management when the benefits translate to profitability as normally what is on paper may differ from what will be implemented.
This is so following their 2010 rights offer which most market followers regard as a failed bid.
In addition, CFI’s transaction with Grindrod Trading which failed to materialise also supports this view. Strategies to address competition and debt levels in a depressed environment are required.
Overall, only time will tell on whether financial benefits will be realised as the $18 million is only a facility.
For feedback and comments email: [email protected]
Online Reporter